Adjustment Assistance and Globalization: Not Much of a Deal

As Congress debates a new set of trade pacts there is an effort to expand trade adjustment assistance as a political quid pro quo. The logic is that new trade deals may cause some number of workers to lose their jobs, but additional adjustment assistance will offset much of the pain. This reasoning seriously misrepresents the economic impact of trade and is likely to divert the country from trade policies that benefit the bulk of the population.

The key point – which every economist knows – is that the vast majority of workers who are harmed by trade do not lose their jobs. The main impact of trade is on wages, not jobs. The basic story is that the availability of lower priced imports will displace some number of workers directly. For example, if we buy more cars from South Korea or some other country with whom we have a trade deal, there will be a decline in the number of workers employed producing cars in the United States. These workers may qualify for the sort of trade adjustment assistance programs that are being debated in Congress.

Of course, even here the story may not be clear cut. Autoworkers may lose their job simply because a particular model is not selling well, or possibly due to the fact that productivity growth reduces the number of workers needed to produce a car. It may not always be possible to determine that increased auto imports from Korea led to any specific autoworker losing his or her job.

But even if we can get around the problem of determining the actual job losers from trade, and then make them whole or at least improve their plight with adjustment assistance, we have only addressed a small part of the damage. The real damage stems from the fact that we have depressed the demand for a specific type of labor – in this example manufacturing workers.

According to standard economic theory, lower demand for manufacturing workers means that the wages of all manufacturing workers will fall. In fact, since increased imports have led to the loss of millions of jobs in manufacturing, it leads to downward pressure on the wages of large segments of the workforce who might conceivably have worked in manufacturing.

The job loss in manufacturing caused by trade puts downward pressure on the wages of the 70 percent of the workforce that lacks a college degree. This is simple supply and demand. Increased imports of manufactured goods reduced the demand for workers with less than a college education. This has been one of the main reasons why most workers have seen very little benefit from economic growth over the last three decades.

It is important to understand proposals for trade adjustment assistance in this context. Expanded assistance may provide more aid to people who have lost their jobs due to trade, but it does nothing to help the tens of millions of workers who experience pay cuts as a result of expanded trade, but do not actually lose their jobs. Any program that ensured that all the losers from new trade deals were compensated would be extremely expensive, since it would mean providing assistance to tens of millions of workers.

This fact is well-known to trade economists, yet it is almost completely absent from public debates on trade. The pundits and politicians who support recent trade agreements would like the public to believe that the losers from trade are only the people who lose their job. This makes it reasonable to suggest trade adjustment assistance as a way to ensure that everyone benefits from trade. However, such measures can at best only benefit a small portion of the losers from trade.

The public should be clear that when we continue expanding trade along its current path, the bulk of the workforce is likely to end up as losers. Helping those hardest hit with adjustment assistance may still be a good thing, but it does nothing for the most majority of workers who are hurt by trade. Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.